Is Advertising an Expense or an Investment?

When you look at a balance sheet, advertising is listed on the expense side of the ledger. That’s how many business owners view advertising – as an expense. It’s a liability to them.  In their eyes, it takes away from the bottom line – not add to it. The goal is to spend as little as possible on advertising. Some even boast that spend far less than their competitors (usually smaller competitors).

On the other hand, if you see advertising as an investment, the possibilities are endless. As a business owner, your advertising can and should produce predictable income in the form of increased sales and profits.

The problem is most business owners don’t know what their advertising ROI is to help them have confidence to invest more and grow sales.

There’s a simple formula any business owner can use to calculate your advertising ROI.

1. Add up your sales volume for over the past month, quarter or year.
2. Calculate your gross profit margin as a percent of sales. (gross profit includes variable expenses such as cost of goods and sales commissions. It doesn’t include fixed overhead expenses which would be net profit.)
3. Multiply your total sales times your gross profit margin. That will give you total gross $ profit.
4. Next add up your advertising expenses for the same sales period. Divide your advertising expenses by your gross $ profit.
5. The percentage is your advertising ROI.

Example:

Sales: $100,000

Gross profit Margin: 30%

Gross profit: $30,000

Advertising Expenses: $10,000

ROI: 33% ($3 dollars in gross profit for every $1 spent in advertising)

If you knew you could be making $3 dollars in profit for every $1 spent in advertising, wouldn’t you have confidence to increase your advertising investment.  You bet. Maybe by a lot.

Your numbers by be different than the example above, but when you know what your advertising ROI is, you’ll begin to see advertising as an investment. Your advertising can and should be a tremendous asset that gives you a major competitive advantage over your competition. Businesses who aggressively advertise will in the long run have much greater sales and profits than their competition.

There are many ways to increase your advertising ROI such as negotiating better media prices, having better creative, having better follow up systems, and staying top of mind with prospects, just to name a few.

Now if find that and you have 0% or negative advertising ROI, that should make for some serious discussion about making changes in your advertising plan.

If that’s you, please give us a call and we’ll give you our ideas how to increase your advertising ROI.